'By virtue of exchange, one man's prosperity is beneficial to all others.' – Frédéric Bastiat

Is Newfoundland and Labrador a “Petrostate?”

Falling oil prices have directed attention towards Canada’s oil-producing provinces, including Newfoundland and Labrador (NL). While lower gas prices should be a boon to most Canadians, Newfoundlanders look warily to oil’s plunging market price as a sign of harder economic times. In fact, the provincial government recently forecasted $916 million in the red–much higher than previously anticipated.

The provincial government in NL projected 2015 to feature surpluses and fiscal expansion. NL has been benefiting from oil exploitation for the better part of the last decade and has joined Canada’s club of “have” provinces in the wake of a veritable economic boom. Resource extraction can confidently be identified as the sole cause of this boom–as is the case in other provinces such as Saskatchewan–and with it comprising close to 37 per cent of provincial GDP, one may wonder if NL is a “rentier” province and victim to the associated “resource curse” that often plagues naturally abundant states.

Terry Lynn Karl’s influential work on the ideas of rentier states and the “paradox of plenty” provides insight into the case of NL. The former refers to a polity that derives a substantial portion of its revenues from indigenous resource extraction and sale, while the latter refers to the paradoxical effect of resource abundance: weak economic development and overspecialization in extractive industries, corrupt state institutions, and poor governance. Rentier states often suffer from “Dutch Disease,” i.e. when the manufacturing or agricultural sector in a particular country (or jurisdiction) declines in the face of rising natural resource exports, which results in rising wages and currency appreciation. Ultimately, this phenomenon makes exports from other sectors more expensive, weakening their competitive advantage. States like these are often awash with cheap money, encouraging patronage politics, populism and voter apathy à la “no taxation, no representation.” Dependent polities are much at the mercy of global markets, and their dependence on energy exports can exacerbate economic shocks. Moreover, governments in petrostates have little incentive to invest in long-term growth plans or economic diversification.

Newfoundland has had a long history of dependence on singular sources of income. The fishery, for example, had long dominated the Island’s economy and continued to do so until the 1990s when it suffered a veritable collapse that devastated the province. Much like oil, global seafood markets were subject to flux and rested on global fish prices. Nonetheless, it laid the foundation for Newfoundland’s consistent dependency on external forces for prosperity, which reduces the incentive to develop human capital and diversify the economy. More damaging is that patronage and nepotism in the province became widespread. Eventually, NL began receiving large amounts of federal assistance and, as Kimble Ainslie argues, a distinct political culture of dependency developed in the province.

Dependence shifted from federal money to oil rents as the wells began operating in the early 2000s. Under Danny Williams’ leadership, Newfoundland and Labrador’s coffers filled quickly–and public spending rose in sync–as the province’s economy began to boom. Infrastructural investments under Premier Dunderdale and social spending under Premier Davis did not slow as oil prices began plummeting. In response, the Davis government has abruptly cancelled proposed spending and the future is uncertain, but not necessarily dire.

The legacy and conditions for rentierisme are certainly there, but can one be sure that contemporary Newfoundland and Labrador really fits the petrostate bill? I will explore this question in Part Two.

Leo Plumer is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics and political science at McGill University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies